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How Foreclosure Works

How foreclosure procedures work, in both judicial and non-judicial foreclosure states.

Foreclosure happens when you fall behind on your house payments and your lender uses state procedures to sell your house. Foreclosure works differently in different states. In some states, the lender has to file a lawsuit to foreclose (judicial foreclosure), while in others, it can foreclose without going to court (non-judicial foreclosure).

Here’s a rundown of the basic procedures for each type of foreclosure.

Judicial Foreclosure

In a judicial foreclosure, the lender must go to court to get the foreclosure started. A judicial foreclosure typically takes several months or more, giving you time to look for another place to live, and to save some money for the future. Another advantage is that you can raise in court any legal defenses you may have to the foreclosure (without having to file your own lawsuit).

States Using Judicial Foreclosure

With some exceptions, foreclosures go through court in these states:

Arizona

New Jersey

Delaware

New Mexico

Florida

New York

Hawaii

North Dakota

Illinois

Ohio

Indiana

Oklahoma

Iowa

Pennsylvania

Kansas

South Carolina

Kentucky

South Dakota

Louisiana

Vermont

Maine

West Virginia

Nebraska

Wisconsin

Procedures in a Judicial Foreclosure

Here’s how a typical judicial foreclosure might proceed.

You get behind in your mortgage payments. A mortgage holder can begin foreclosure procedures if you miss just one payment, but usually will wait longer -- much longer in many states.

The lender sends a notice of intent to begin foreclosure. In many states, the lender sends a ten-day notice of intent to begin foreclosure proceedings. The notice informs you that the proceedings can be avoided if you make up the missed payments, plus costs and interest.

The lender files a lawsuit. If you don’t make up the missed payments, the lender will then go to court and file a lawsuit.

The lender gives you notice of the lawsuit. The lender does this by delivering a Summons and Complaint to you (called “serving you with” a Summons and Complaint in legalese).

You have a chance to respond. The Summons and Complaint give you a period of time within which you must respond if you choose to contest or argue the lawsuit (usually between 15 and 30 days). Whether or not you file a response is up to you. Either way, your lender will have the burden of proving to the judge that the foreclosure is justified under the terms of the mortgage.

If you don’t respond, the chances are excellent that the foreclosure will go through. The court will issue a default judgment that authorizes the lender to sell your home.

If you do respond, you’ll have the opportunity to tell a judge just why you think you have a legal right to keep your house and that foreclosure is not warranted. The better your defenses, the longer the process will drag out in court. Even if you win, however, it may be a temporary victory if the lender can fix whatever problem caused it to lose this time.

The lender sends a notice of intent to sell. Once the judge issues a judgment, the lender typically will send you a ten-day notice of intent to sell the property. At this point, in many states you can avoid the foreclosure sale if somehow you can “redeem” the mortgage (pay it off in full, as well as the foreclosure costs and attorney's fees).

The auction is held. If no one buys your home at the auction, ownership goes to the lender. Up to this point, the entire process, from the first notice to the auction, typically takes three months -- more, if you file a response to the Summons and Complaint.

You are allowed to stay or get evicted. Even when you lose ownership of your home, most state laws don’t require you to move out right away. The lender may just let the house sit, waiting for the market to improve. You can remain in the home payment-free until you receive an official, written eviction notice.

Non-Judicial Foreclosures

If you live in a non-judicial foreclosure state, your lender does not have to go to court in order to foreclose on your home. This means that the foreclosure can proceed more quickly.

If your property is in one of these states, you most likely signed two core documents when you bought or refinanced your home: a promissory note and a deed of trust. The deed of trust turns the promissory note into a debt secured by a lien (legal claim) on your home. The deed of trust authorizes the lender to foreclose on the property if you default. The deed of trust typically allows the foreclosure to proceed outside of court, under state law.

States Using Non-Judicial Foreclosure

Alabama

Nevada

Alaska

New Hampshire

Arizona (sometimes)

New Mexico (sometimes)

Arkansas

North Carolina

California

Oklahoma (unless homeowner requests judicial forclosure)

Colorado

Oregon

District of Columbia

Rhode Island

Georgia

South Dakota (unless homeowner requests judicial foreclosure)

Idaho

Tennessee

Maryland

Texas

Massachusetts

Utah

Michigan

Vermont (sometimes)

Minnesota

Virginia

Mississippi

Washington

Missouri

West Virginia (sometimes)

Montana

Wyoming

The Non-Judicial Foreclosure Process

Your state’s law sets out the specifics of the foreclosure procedure, including how much notice you get, how the property will be sold (typically at a public auction), and what rights (if any) you have to reinstate the loan before the foreclosure date or recover title to the property after it’s sold.

Time may be short. You have to be on your toes when a foreclosure looms in a non-judicial state. That’s because you'll be given very little notice of the foreclosure sale, and once it happens, you may be permanently out of luck.

Notice of sale. In most states, your first notice of the proceeding will be the notice of sale. Depending on the state, this notice will be either served on you personally, published in the local newspaper, posted in the courthouse and on the property itself, or by some combination of the above.

Notice of default and notice of sale. Some states provide you with two notices -- a formal written notice that you are in default (usually about 30 days, but sometimes more and sometimes less) and another formal notice that your house will be sold at auction (again, usually about a month, but it can be as little as 15 days -- in Georgia, for example, and a few other states).

Right to reinstate. Between the notice of default and notice of sale, you typically are allowed to reinstate the mortgage by paying off what you owe, plus fees and costs (which can be very high). With a couple of exceptions, however, once the sale occurs, your house is gone.

The auction is held. If you don’t reinstate the mortgage, the home will be sold at auction. As with judicial foreclosures, if no one meets the minimum bid, the property goes to the lender.

Right to redeem. A few states give you some time after the foreclosure auction to redeem the property (to recover ownership of the property by paying off the successful bidder).

Challenging a Non-Judicial Foreclosure in Court

Because you don’t have the opportunity to raise defenses to the foreclosure in a non-judicial foreclosure, if you wish to contest the foreclosure, you will have to file a lawsuit yourself. When you do this, you ask the court to temporarily stop the foreclosure so that you can resolve the legal issues in court (and possibly at trial). Once you are in court, you can raise the same defenses you would have raised in a judicial foreclosure proceeding.

In these lawsuits, you typically ask the court for three things, in the following order:

a temporary restraining order (which lasts about ten days)

a preliminary injunction (which, in foreclosure actions, will last until the court decides the case), and

a permanent injunction (which will be issued if the judge decides in your favor).

To learn more about the ins and outs of foreclosure, both judicial and non-judicial, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).

Repossession: What Creditors Can and Can't Take

Find out what property your creditors can repossess, and what’s off limits.

If you’re behind in your loan payments, you may be worried that the creditor can repossess something you own -- your car, your home, the new refrigerator. Repossession is what happens when a creditor takes back property you have used as collateral (security) for a loan because you have defaulted on the loan agreement. There are strict rules as to what a creditor can and cannot take if you default on a loan.

Typically, you default on a loan if you don’t make your monthly payments in full and on time. But you could also be in default if, for example, you don't maintain insurance coverage on a car you financed. Though credit agreements differ and laws vary from state to state, here are some general guidelines for what creditors can and can’t repossess.

What Can Be Repossessed?

Below is list of what creditors can repossess if you default on a loan. If a creditor is allowed to repossess an item, the creditor does not have to go to court and get a judgment before it repossesses the property.

Your home. Your home loan is secured by the property you purchased with it. If you do not make your mortgage payments, the lender can repossess the home. This is what happens in a foreclosure. After the lender evicts you, it sells the property to recover as much of the outstanding loan balance as possible.

Your car. Most auto loans, whether obtained through the dealer, a bank, a credit union or any other lender, give the creditor the right to repossess the vehicle if you default on the car loan. The lender is not required to give prior notice. After repossessing your car, the lender will sell it to recover the money you owe. If there is a shortfall between your outstanding loan balance and the sale price, you may be held responsible for paying it, plus the creditor’s repossession expenses.

Rent-to-own items. This includes furniture, electronics, appliances, and anything else you rent with the option of purchasing.

Any property used as collateral. A debt is secured if a specific item of property (called collateral) is used to guarantee repayment of the debt. If you don't repay the debt (or are in default on the loan for some other reason), most states let the creditor take the property without first suing you and getting a court judgment.

For example, say you have a car that you do not owe any money on, and you offer it as collateral on a loan for a new business. If you fail to fulfill the terms of that loan agreement, your car can be taken. (Repossess is a bit of a misnomer in this sense, because the lender may never have owned an interest in the item that is being taken.)

If you are unsure whether a debt is secured, check your credit agreement. Your credit agreement will also detail the things that would put you in default on the loan (for example, being behind on your payments or not maintaining proper insurance).

What Can’t Be Repossessed?

Here’s a list of what creditors cannot repossess if you default on a loan. Keep in mind, however, that the creditor can always sue you in court to recover the money you owe. If the creditor wins the lawsuit, it may be able to garnish your wages or put a lien on your property.

Property not specifically named as collateral. If something is not specifically named as collateral for a debt, it cannot be repossessed. So, for example, say you have an unsecured personal loan and a car loan, both with A&B Bank, and you default on the personal loan. As long as you continue to make payments on the car loan, the bank cannot repossess your car because it was not specifically named as collateral for the personal loan.

Credit card purchases. Credit card debt is unsecured, which means the credit agreement does not name anything as collateral for the loan. Therefore, items purchased with a credit card cannot be repossessed.

Property named as collateral in an unenforceable contract. A contract that does not comply with your state’s legal requirements may be void and unenforceable. A lawyer can review your contract for validity and advise you on your consumer rights.

Short Sales and Deeds in Lieu of Foreclosure

A short sale or deed in lieu may help avoid foreclosure or a deficiency.

Many homeowners facing foreclosure determine that they just can’t afford to stay in their home. If you plan to give up your home but want to avoid foreclosure (including the negative blemish it will cause on your credit report), consider a short sale or a deed in lieu of foreclosure. These options allow you to sell or walk away from your home without incurring liability for a “deficiency.”

To learn about deficiencies, how short sales and deeds in lieu can help, and the advantages and disadvantages of each, read on.

Short Sale

In many states, lenders can sue homeowners even after the house is foreclosed on or sold, to recover for any remaining deficiency. A deficiency occurs when the amount you owe on the home loan is more than the proceeds from the sale (or auction) -- the difference between these two amounts is the amount of the deficiency.

In a “short sale” you get permission from the lender to sell your house for an amount that will not cover your loan (the sale price falls “short” of the amount you owe the lender). A short sale is beneficial if you live in a state that allows lenders to sue for a deficiency -- but only if you get your lender to agree (in writing) to let you off the hook.

If you live in a state that doesn’t allow a lender to sue you for a deficiency, you don’t need to arrange for a short sale. If the sale proceeds fall short of your loan, the lender can’t do anything about it.

How will a short sale help? The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. The general thinking is that your credit won’t suffer as much as it would were you to let the foreclosure proceed or file for bankruptcy.

What are the drawbacks? You’ve got to have a bona fide offer from a buyer before you can find out whether or not the lender will go along with it. In a market where sales are hard to come by, this can be frustrating because you won’t know in advance what the lender is willing to settle for.

What if you have more than one loan? If you have a second or third mortgage (or home equity loan or line of credit), those lenders must also agree to the short sale. Unfortunately, this is often impossible since those lenders won’t stand to gain anything from the short sale.

Beware of tax consequences. A short sale may generate an unwelcome surprise: Taxable income based on the amount the sale proceeds are short of what you owe (again, called the “deficiency”). The IRS treats forgiven debt as taxable income, subject to regular income tax. The good news is that there are some exceptions for the years 2007 to 2009. To learn more, see “Income Tax Liability in Short Sales and Deeds in Lieu,” below.

Deed in Lieu of Foreclosure

With a deed in lieu of foreclosure, you give your home to the lender (the “deed”) in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Be sure that the lender agrees, in writing, to forgive any deficiency (the amount of the loan that isn’t covered by the sale proceeds) that remains after the house is sold.

Before the lender will accept a deed in lieu of foreclosure, it will probably require you to put your home on the market for a period of time (three months is typical). Banks would rather have you sell the house than have to sell it themselves.

Benefits to a deed in lieu. Many believe that a deed in lieu of foreclosure looks better on your credit report than does a foreclosure or bankruptcy. In addition, unlike in the short sale situation, you do not necessarily have to take responsibility for selling your house (you may end up simply handing over title and then letting the lender sell the house).

Disadvantages to a deed in lieu. There are several downfalls to a deed in lieu. As with short sales, you probably cannot get a deed in lieu if you have second or third mortgages, home equity loans, or tax liens against your property.

In addition, getting a lender to accept a deed in lieu of foreclosure is difficult these days. Many lenders want cash, not real estate -- especially if they own hundreds of other foreclosed properties. On the other hand, the bank might think it better to accept a deed in lieu rather than incur foreclosure expenses.

Beware of tax consequences. As with short sales, a deed in lieu may generate unwelcome taxable income based on the amount of your “forgiven debt.”

Income Tax Liability in Short Sales and Deeds in Lieu

If your lender agrees to a short sale or to accept a deed in lieu, you might have to pay income tax on any resulting deficiency. In the case of a short sale, the deficiency would be in cash and in the case of a deed in lieu, in equity.

Here is the IRS’s theory on why you owe tax on the deficiency: When you first got the loan, you didn’t owe taxes on it because you were obligated to pay the loan back (it was not a “gift”). However, when you didn’t pay the loan back and the debt was forgiven, the amount that was forgiven became “income” on which you owe tax.

The IRS learns of the deficiency when the lender sends it an IRS Form 1099C, which reports the forgiven debt as income to you.

No tax liability for some loans secured by your primary home. In the past, homeowners using short sales or deeds in lieu were required to pay tax on the amount of the forgiven debt. However, the new Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changes this for certain loans during the 2007, 2008, and 2009 tax years only.

The new law provides tax relief if your deficiency stems from the sale of your primary residence (the home that you live in). Here are the rules:

Loans for your primary residence. If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don’t have to pay tax on the deficiency.

Loans on other real estate. If you default on a mortgage that’s secured by property that isn’t your primary residence (for example, a loan on your vacation home), you’ll owe tax on any deficiency.

Loans secured by but not used to improve primary residence. If you take out a loan, secured by your primary residence, but use it to take a vacation or send your child to college, you will owe tax on any deficiency.

The insolvency exception to tax liability. If you don’t qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were legally insolvent at the time of the short sale, you won’t be liable for paying tax on the deficiency.

Legal insolvency occurs when your total debts are greater than the value of your total assets (your assets are the equity in your real estate and personal property). To use the insolvency exclusion, you’ll have to prove to the satisfaction of the IRS that your debts exceeded the value of your assets.

Bankruptcy to avoid tax liability. You can also get rid of this kind of tax liability by filing for Chapter 7 or Chapter 13 bankruptcy, if you file before escrow closes. Of course, if you are going to file for bankruptcy anyway, there isn’t much point in doing the short sale or deed in lieu of, because any benefit to your credit rating created by the short sale will be wiped out by the bankruptcy.

Timothy L. Dave, Central Florida Bankruptcy Attorney

The Law Office of Timothy L. Dave, P.A., practicing in the area of bankruptcy law serves clients in the Central Florida area; including the cities of Orlando, Sanford, Lake Mary, Kissimmee, Altamonte Springs, Oviedo, St. Cloud, and the surrounding areas of Brevard, Duval, Volusia, and Hillsborough counties.

Tips on Getting a Car Loan Approved After Bankruptcy

A car loans after a bankruptcy is one way to help build back your credit history. In fact, once your bankruptcy closes, you can apply for a car loan the next day. To get approved with the best rates for your car loan, follow these tips.

Review Your Credit Report

Before you start applying for a car loan, check out your credit report and make sure all your accounts are in order. It is not uncommon after a bankruptcy to see open accounts that should be closed, which hurt your credit rating.While looking at your credit report, consider adding a page explaining the situation that resulted in your bankruptcy. If there were extenuating circumstances, lenders may approve you for a better rate than under normal conditions.

Plan Your Car Purchase

Before purchasing a vehicle, decide what you can afford in a monthly car loan payment. This will help you decide which financing package is best for you. Both the loan amount and length of payments will determine your monthly payments, so there is flexibility in determining which vehicle you can afford to purchase.

Use A Car Loan Lender

Car loan lenders make their money by finding you a loan. Car loan lenders work with several financing partners to back loans with all types of credit risk, including bankruptcies.Online car loan lenders deal with thousands of loans, and can usually find you a better deal than your local car dealerships. Online car loan lenders will send you a check when you are approved, basically making you a pre-approved car loan buyer.

Explain Your Situation

Car loan applications will ask if you have ever declared bankruptcy and why. This is your chance to explain what led up to the situation and what steps you have taken to resolve your credit situation. Be sure to include improvements in your financial history too.

Consider Refinancing

Once you are approved for a car loan, keep your eye on future refinancing. By making regular payments on all your bills, in a year's time you could qualify for significantly lower interest rates. In three years, you can build your credit score to near excellent and qualify for even lower rates.

What Bankruptcy Can and Cannot Do

Legal Library -
Bankruptcy Articles

Bankruptcy is a powerful tool for debtors, but some kinds of debts can't be wiped out in bankruptcy.

Bankruptcy is good at wiping out credit card debt, but you may have trouble eliminating some other kinds of debts, including child support, alimony, most tax debts, student loans, and secured debts.

What Bankruptcy Can Do

If you are facing serious debt problems, bankruptcy may offer a powerful remedy. Here are some of the things filing for bankruptcy can do:

Wipe out credit card debt and other unsecured debts. Bankruptcy is very good at wiping out credit card debt. Unless you have a special "secured" credit card, your credit card balance is an unsecured debt -- that is, the creditor does not have a lien on any of your property and cannot repossess any items if you fail to pay the debt. This is precisely the kind of debt that bankruptcy is designed to eliminate. Besides credit card debt, you may have other unsecured debts, and bankruptcy can wipe these out as well.

If you file for Chapter 13 rather than Chapter 7, you may have to pay back some portion of your unsecured debts. However, any unsecured debts that remain once your repayment plan is complete will be discharged.

Stop creditor harassment and collection activities. Bankruptcy can stop creditor harassment, but if the "harassment"' is simply phone calls and letters, there are simpler ways to stop it; . If the harassment is more serious -- for instance, if the creditor is about to repossess your car or foreclose your mortgage -- bankruptcy can help; .

Eliminate certain kinds of liens. A lien is a creditor's right to take some or all of your property and will survive bankruptcy unless you invoke certain procedures during your bankruptcy case. For more information, see How to File for Chapter 7 Bankruptcy, by attorney Stephen Elias, attorney Albin Renauer, and Robin Leonard, J.D. (Nolo).

What Bankruptcy Can't Do

Here's what bankruptcy cannot do for you:

Prevent a secured creditor from repossessing property. A bankruptcy discharge eliminates debts, but it does not eliminate liens. So, if you have a secured debt (a debt where the creditor has a lien on your property and can repossess it if you don't pay the debt), bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property.

Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy -- you will continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, your plan will have to provide for these debts to be repaid in full.

Wipe out student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only if you can show that repaying the loan would cause you "undue hardship," a very tough standard to meet. You must be able to show not only that you cannot afford to pay your loans now, but also that you have very little likelihood of being able to pay your loans in the future.

Eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it is sometimes possible for older debts for unpaid income taxes. There are many requirements to be met, however.

Eliminate other nondischargeable debts. The following debts are not dischargeable under either Chapter 7 or Chapter 13 bankruptcy:

debts for personal injury or death caused by your intoxicated driving, and

fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution.

If you file for Chapter 7, these debts will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your repayment plan. If they are not repaid in full, the balance will remain at the end of your case.

In addition, some types of debts may not be discharged if the creditor convinces the judge that they should survive your bankruptcy. These include debts incurred through fraud, such as lying on a credit application or passing off borrowed property as your own to use as collateral for a loan.

What Only Chapter 13 Bankruptcy Can Do

Chapter 7 can't help you with these situations, but Chapter 13 can:

Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan where you make up the missed payments over time while staying current on your regular monthly payments. To make this plan work, you must be able to demonstrate that you will have enough income in the future to support such a repayment plan.

Allow you to keep nonexempt property. You don't have to give up any property in Chapter 13 because you use your income to fund your repayment plan.

"Cram down" secured debts that are worth more than the property that secures them. You can sometimes use Chapter 13 to reduce a debt to the replacement value of the property securing it, then pay off that debt through your plan. For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and have the rest of the loan discharged. However, under the new bankruptcy law, you can’t cram down a car debt if you purchased the car during the 30-month period before you filed for bankruptcy. For other types of personal property, you can’t cram down a secured debt if you purchased the property within one year of filing for bankruptcy.

"The hiring of a lawyer is an important decision that should not be based solely on advertisements. Before you decide, ask us to send you free written information about our qualifications and experience." The Law Office of Timothy L. Dave, P.A., serves clients in the Central Florida area; including the cities of Orlando, Sanford, Lake Mary, Kissimmee, Altamonte Springs, Oviedo, St. Cloud, and the surrounding areas of Brevard, Duval, Volusia, and Hillsborough counties.

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